The rules regarding tax deductions for home improvements and repairs can be complex and confusing, even for the pros. But sooner or later, all properties are going to need a little TLC – and you’re going to have to figure out how to treat them on your tax returns.
First, let’s take a look at personal residences.
Home Improvement and Tax Deductions for Personal Home
The IRS considers repairs and renovations on your personal residence to be personal expenditures, not business expenditures. So unless special circumstances apply, such as the use of part of your home for business purposes (see the so-called “home office deduction” for more information on this), you cannot take a current-year tax deduction for maintenance costs and renovations on your personal residence.
In compensation, however, your tax break for personal homeownership comes when you sell the property: Provided you have lived in the property for at least three of the five years prior to the sale (special rules apply for military members who had to leave home on orders), you are entitled to a capital gains tax exclusion of $250,000 if you are single or $500,000 if you are married and file a joint income tax return.
An Introduction to Tax Basis
The IRS calculates a taxable gain as the difference between your sale price for the property and your tax basis. This number is the sum of all investments you have made in the property over the years, from the time you made the purchase through the new roof to the new paint and the new indoor pool you put in, all the way to replacing the bathroom tiles right before your real estate agent showed the home.
Then you subtract any deductions you took to arrive at your adjusted basis (though these are few and far between for personal residences). Your taxable gain is your sale price minus your adjusted basis. If the resulting number is negative, then you have a capital loss.
For investment properties, however, the system is more complicated. You must differentiate between a renovation or improvement and a repair. Further, you must understand depreciation and amortization, which is how costs that provide a benefit over many years, as well as the gradual wear and tear or decay of a property, are accounted for on your tax return.
Repairs vs. Home Improvements and Renovations
When you spend money simply to keep a property functioning and usable, and prevent its deterioration, or do routine and ongoing maintenance on an investment property, as opposed to a personal residence, the IRS classifies these activities as repairs, and recognizes these as an everyday cost of doing business.
There is a grey area between repair projects and renovations. But according to a recent article in the Journal of Accountancy, you can’t take a direct deduction for anything you pay for brand new buildings, nor can you take a current year deduction for any permanent improvements that increase your property values. Additionally, you don’t get to deduct any amount you spend restoring property (other than routine repairs), or in renovating a property after you’ve already taken a depreciation deduction. Moreover, under Treasury Regulation 1.263(a)-1(b), you can’t immediately deduct the cost of any projects that substantially prolong the useful life of property owned by the taxpayer or (2) adapt property to a new or different use.
Repairs and Routine Maintenance
Here are some examples of repairs:
- Cleaning carpets and drapes
- Cleaning air ducts and vents
- Repairing a broken handrail in a shower or staircase – restoring the original function of the property.
- Repairing broken glass after severe weather.
Renovations and Home Improvements
Renovations, on the other hand, are projects that involve improving the property from its original or normal function, increasing the property’s value, substantially lengthening its expected life, or converting it to a new purpose altogether. Generally, these are expenditures that will pay dividends or provided benefits for longer than one year – and potentially improve your investment income or resale value as an investor.
These expenditures cannot generally be deducted all in the first year. Instead, the IRS does not consider these costs to be business expenses, deductible as you pay them. Instead, the IRS considers these expenditures to be capital investments – and subject to a different set of rules: You must generally spread these deductions out over the probable useful life of the property in a process called amortization and depreciation.
Example of Depreciation
Let’s say you wanted to build an addition to an investment property, to install, say, a new bedroom. You spend $25,000 on the renovation. It adds to the value of the property, so it does not qualify for a tax deduction in the current year.
By spending the $25,000, you have increased your tax basis in the property by the same amount.
After that point, however, the IRS knows that that home improvement, like almost any capital investment, will deteriorate over time. So the tax code provides a way for you to deduct the invisible losses represented by that deterioration and wear and tear. To figure out your allowable deduction, fill out a copy of IRS Form 4562. The IRS publishes more details in Publication 946 – How To Depreciate Property. But in a nutshell, you can choose one of a few different methods to calculate your annual depreciation.
Each kind of property has a different depreciation schedule, based on an estimate of its useful life. Investment structures are assumed to have a useful life of 27 years, under Modified Accelerated Cost Recover System (MACRS) rules – which is what you use for property you placed into service prior to 1986, so you can gradually take your deduction over that period of time. However, your tax basis declines as you recoup your costs through depreciation, as well. For residential real property years, theoretically, your adjusted basis in the asset will actually reach zero after 27.5 years – the depreciation period for residential rental real estate.
Another example: What can you deduct each year on a $25,000 capital improvement project? The most straightforward method is this: Divide your investment by the depreciation period for that class of property. Since residential real estate is 27.5 year property, you can take a deduction of $909.91.
cost/depreciation period = depreciation tax deduction
$25,000/27.5 = $909.91
The process of spreading depreciation deductions out over the expected life of a piece of property is called capitalization.
Note that you cannot depreciate land. Land doesn’t wear out (although you can claim depletion allowances for the extraction of timber and minerals).
For a full breakdown of depreciation rules for residential rental real estate, see IRS Publication 527 – Residential Rental Property.
{ 30 comments… read them below or add one }
Just sold my home, can I deduct on my taxes everything done to home major,I.e.
Finished basement, total gut and remodel kitchen and 3bathes,replaced all exterior doors and windows. Installed hardwood floors, all interior doors. Replaced deck 3 times in 37 years due to rot.
Thanks, c.s.
I had a rental property and it had a cracked tile in the island I couldn’t find the correct tile to fix the island so I replaced it. Is this a repair or improvement. I don’t believe this increases the value of my home so I was going to count it as a repair. Please let me know
Also the AC is broken and I need to replace it. Replacing the AC wouldn’t increase the value of the house since it already had AC so is this an improvement or repair. It’s really touch to distinguish the difference between these categories. I don’t think fixing AC increases value and I had already increased the basis of the value of the house by $3000 because that’s what I paid when I originally bought the house. This house is now a rental but I used to live in it.
I just wanted to say thank you Jason for such a great article with clear explanations (including answers to the questions). This helped me tremendously with my 2012 tax return I just filed!
Hello, I am doing various improvements on my home, carpet, new paint, ceiling fans, new cabinets, can any of this be claimed on my taxes, thanks.
Jason….
I am a general building contractor and replaced my very old roof last year using a HELOC to pay for it. I paid myself to do the work, acquired permits and paid all expenses to do the project which included termite damage also. This is my personal home. My question is do I claim this project as income and treat it as all my other income, or is this deducted at time of sale and added to my basis?
Thank you in advance
Brian
We replaced part of our house with wood flooring also painting walls. Is this tax deductable?
Thanks
Hi,
Thanks for writing a wonderful article. I recently got a new job and it requires me to work from home. I am adding and addition to our house which will be my new office for work. Can I claim the construction cost of the office as expense in one tax year or do I have to amortize it over 27.5 years? The office part will attached to our house (not a separate property).
Thanks,
AK
We purchased a home in July 2012 and had to replace the windows and doors as most were damaged. The kitchen had no fixtures or counters. Are any of these deductible? What if we are going to rent the property? Thanks.
We inherited property and I considered commercial, as it was part of rental, the insurance company considers it commercial although we use it as a second home and rentivating it to hopefully sale one day what is tax deductible
The sunroom on my house recently began to sink. When I went under the house I realized that when it was built or converted from a pirch into a sunroom, that they used 2x4s to support it and simply stuck them in the earth below. The 2x4s were rotting, as expected, since water was traveling off the patio and right under the sunroom. I have had to raise the room on jacks, take out the 2x4s, poor a concrete foundation and build a supporting wall and pillar just to support the weight of the room and prevent it from sinking or worse, falling off the house. Is any of this tax deductible? Thanks!
Within 6 months of purchasing my home I had to install a$10,000 new roof. Is that deductable?
Why are there no answers to any of these questions? My simple question is…. Is painting the house (outside) a deduction?
Hi, Robin!!! Sorry for the delay!! I’m trying to develop new material for the next columns, and haven’t been able to police up comments as much as I’d like.
The “just enough information to be dangerous” answer – which is the case with most consumer-oriented tax writing, is this:
Personal residence: Pretty much never deductible. It gets added to your basis.
Investment property: Complete paint job as part of a renovation is normally not deductible in the current year. It adds to the value of the home, so it’s considered more of a renovation than a repair. It gets added to your basis, and then depreciated over time.
BUT: Repair to fix some water damage in one corner of a room: Usually deductible as a REPAIR. It’s just bringing some damage up to snuff with the rest of the painted property.
Hope that helps!
Jason
Would resurfacing my asphalt driveway be a deduction, wouldn’t this fall under land improvements?
Hi
I had to repair an area in my house compelely due to termites; including the floor and the walls; can I get any tax deduction?
Hello, Roselis, and thanks for reading!
If it’s your personal residence, no deduction. Add it to basis, and then you have that much less capital gains liability when you sell your home. (Probably a non-issue, since singles get a cap gains exclusion of $250,000 and married couples $500,000 anyway, but nevertheless, the cost of repair does wind up in your tax basis for the home.
If it’s an investment property, your situation is a little trickier. I can see that being a repair, AND a renovation, depending on the set of circumstances. If you had a reasonable expectation that you would have to redo those floors going in, chances are it’s not a deduction. There are also times you can claim certain unforeseen losses as a casualty loss (meaning something you could not have reasonably predicted), then you may be able to get a deduction on anything not reimbursed to you. BUT… “progressive” damage is not one of them. The IRS considers termite and moth damage to be progressive damage, so you can’t claim a deduction for termite damage. Locusts, sure. But not termites. That’s where a personal engagement with a tax pro is necessary… the decision in this case is going to be pretty specific to your situation, based on the specific set of circumstances that I can’t conjecture on in this context.
If you bought the house and it is stated to have severe previous termite damage, and you repair this damage do to your floors caving in, would that be a tax deductable expense?
I inherited my uncle’s house in Nov 2012 when he passed away. I already own my own home where I live. I made $5,000 in repairs to my uncle’s house and sold it this month. I know my basis in his house is the FMV on the date he passed away. Does the $5,000 get added to my basis to arrive at my adjusted basis?
WE REDONE OUR BATHROOM,HAD TO TARE UP FLOOR ANS WALLS TO PUT IN INSULATION AN NEW SIDING ON 2 BEDROOMS REPLACE 3 WINDOWS. WITH ENERGY SAVING ONES, NEW TUB, SINK AND TOILETS AND FLOORING . wHAT CAN WE DEDUCT?
How about deducting the cost of a new septic system?
If it’s your residence, there’s no deduction. Add it to your cost basis. You recover it (in theory) when you sell the house. In reality, it’s usually covered under the capital gains exception for selling a personal residence (provided you have met the ownership and use test.)
If it’s an investment property, you would add it to your cost basis, and depreciate it over the expected life of the system. Now, read carefully: Normally, the depreciation period 27.5 years for integral parts of the structure of a residential building, such as venting, furnaces, new plumbing (as opposed to repairs), etc.
BUT…. Septic systems are sometimes a little different. These are separate from the building itself, and considered a LAND IMPROVEMENT, not an improvement to the structure. But if they are land improvements that are closely tied with the structure- such that the system or improvement will probably be destroyed (or have to be reinstalled) if you replace the building, you can depreciate them faster: over 15 years – in the same category as fencing and shrubbery.
See here: recenter.tamu.edu/pdf/1752.pdf
In December 2012 I bought a new property and moved in. We are currently fixing it up with new appliances, carpet, paint and other repairs. The intent is to place it as a rental in April of 2013. Are all the repairs deductable in 2013 once the property is place in service?
Hi, John!
The appliances are new, so you would depreciate those over time … think 5 to 7 years, depending on the appliance. Same for paint, if you do a new paint job, as opposed to a little touch-up to fix damage to the paint in a specific spot. New carpet is also depreciated over 5 years under MACRS rules. Each of these is specifically mentioned in the table, here: irs.gov/publications/p527/ch02.html
Now, you won’t be able to take a full deduction for 2013. It would be a partial year, because it was your own residence for January to April. But the cost still gets added to your cost basis in the home, and depreciated once it’s “placed in service” in a rental property.
Hello,
I have a question to ask?
On Jan 1/13 I was broken into. The sliding glass door was shadder. I am on low income so I could not afford to pay out right for the glass door/instalation. Property management is paying for it but I have to pay them back installments. They had hired Delta Glass Co to do the work. Property management is the one that sent me the quote that was $275.00 that is for the single pane patio door glass, taxes, installed. But Delta Glass refuses to give the amount for the glass, tax, installed for me to ask the property management. They also refuse to give that information as well. I am paying the $275.00 back. It is my right to know. It sounds like they want to file on Real Estate tax deduction even though I am paying them back. I have a home business and I can write it off as business expence.
Brenda
I purchased a new roof. Is this a deductiion on my taxes?
Hi, Gloria!
If it’s your personal residence, no. You add the cost of the new roof to your tax basis in the home.
If it’s an investment property, you also don’t normally take a 1st year deduction. Instead, you add the cost of the roof – including labor – to your basis in the property. Then you gradually take a depreciation deduction.
Now, you can make small repairs to a roof, and take an immediate deduction as a rental expense. It’s a repair rather than an improvement. If you replace the whole roof, it’s a permanent improvement that raises the value of the property. So you treat it as a capital expense rather than a repair.
Special rules apply if you are replacing the roof because of a tornado, though. Then casualty loss rules come into play, and that’s a deduction – to the extent your insurance company doesn’t reimburse you.
Hope that helps!
Jason
Hello, and thanks for writing!
The nature of the deduction you can take mostly depends on whether it’s a personal residence or an investment/rental property. If it’s a personal residence (where you live), then you can’t deduct anything. Just add it to your tax basis.
If it’s a rental property and you made a repair, not a renovation or an improvement, you can deduct the expense. You’d use Schedule E for that, unless you hold it in a corporation.See here:http://www.irs.gov/pub/irs-pdf/f1040se.pdf
If it’s an improvement or renovation as opposed to a repair, it gets added to your basis in the property and depreciated over the life of the property. For residential property that’s over 27 and a half years. You take the deduction gradually over that period of time. For more information on that, see IRS Publication 946, How To Depreciate Property. That’s the very basic version. Special rules apply if it’s for partial personal and partial investment use, or if there’s business use of the home involved. That gets very situation-specific, so that’s where you need a tax advisor, because it’s so individual.
Thanks for reading!!!
Jason
I did some remodeling to my bathroom and spent 13, 000. What tax deductions can I receive?
I did work on the basemnent, totalling over 25,000. what tax deduction can I receive? what form do I use?
Hello, Jennifer!
Personal bathroom? No deduction. Add it to basis.
Investment property? Deduct if it’s a REPAIR, but not if it’s a renovation. For an investment property, you add your renovation costs, including labor, to your tax basis, and depreciate over time.
All the best,
Jason